Is a Bridging Loan a Good Idea?

As the dust settles after “Brexit Day”, property investors and developers are feeling optimistic about the housing market in 2020. Many predicted uncertainty surrounding Brexit would lead to a downturn in the market, but house prices rose by 1.4% in 2019. As the political climate calms, sellers and buyers who were reluctant to enter the market amidst such uncertainty may finally feel they can do so. 

Whether you’re an established property professional or keen to get started making money from property, how can you capitalise on the forecasted upturn in the market? Keeping a steady cash flow and raising funds to buy investment properties can be a stumbling block for beginners and professionals alike. An increasing number of successful property developers are starting to realise the benefits of bridging loans. So are bridging loans a good idea for your business?

Huge Growth in the Use of Bridging Loans by Property Investors

According to the latest “Bridging Trends” report, bridging finance accounted for 25% of all lending during Q2 of 2019, an increase of 3% on Q1. While homeowners may have been keeping their powder dry amidst Brexit uncertainty, savvy property investors moved quickly to buy properties at a low price. For business owners who are asset rich but cash poor, a bridging loan can provide quick access to the capital needed to seize a great investment opportunity before prices rise or the competition swoops in.

Research by the Association of Short Term Lenders (ASTL) suggests the popularity of bridging finance amongst property professionals is likely to continue rising. The ASTL survey found 72% of bridging loan providers expect their businesses to grow in the first six months of 2020. Property investors who do not avail themselves of this finance option could find themselves struggling to keep up with competitors who are in a position to act fast. 

Popular Uses of Bridging Loans for Property Businesses

The Financial Conduct Authority (FCA) does not oversee companies that offer unregulated bridging loans, so consequently, these companies provide a much more flexible finance option than traditional mortgage lenders. Property developers may find their plans thwarted by a risk-averse high-street lender who cannot approve a loan for the purchase or renovation of certain types of property. A bridging loan is much more straightforward and quicker to apply for. If the borrower has sufficient assets to provide as security, they will most likely be able to obtain financing.

Provided borrowers repay the loan in full within the time agreed (typically four to 12 months), the borrower can use the funds for a wide range of property projects. Some of the most common uses of a bridging loan include property refurbishment and exit loans to provide developers with cash flow. At the same time, they market property scheme and auction finance, where buyers must complete the sale within 28 days.

How Much Can You Borrow?

Individuals or companies can raise significant capital through bridging loans. Most unregulated loans are offered by small companies that can provide a personalised service, meaning the loan can be tailored to your specific needs. Typically, companies will lend anywhere between £100,000 and £2 million. There are no monthly repayments; the loan is repaid in full at the end of the term agreed. 

Interest rates will be higher than those offered by traditional lenders. Interest accrues each month and is added to the final repayment figure. For property developers who need to act quickly to purchase a great investment property or to “flip” a house, the expected return on investment will absorb the higher interest rates.

Final Thoughts

Bridging loans are a useful source of short-term financing for the asset rich, cash poor property professional. The higher interest rates are easily absorbed by the profit of the project they are used to fund. Bridging loan companies are not bound by the same regulations as mortgage lenders, making this funding a flexible option that can make almost any property project a reality. 

* This article was originally published here